How & Why to Sell Daily Covered Calls on Major Indexes

Jesse Anderson

Published on April 15, 2024

Covered calls are an excellent way to generate extra income – but they come at a cost. 

It’s not uncommon for the underlying price to surpass the strike price, forcing you to either sell stock or roll the call option to a new strike price or expiration date. And, when that happens, you miss out on the increase in price and capital gain.

Daily options, also known as 0DTE options, offer a compelling alternative. Rather than guessing where the price will be in 30 or 45 days, you only need to predict the price movement within a single session, which could help avoid these scenarios and capture more upside.

In this short guide, we’ll introduce you to daily index options, explore why you might consider them, and show you some actionable daily covered call strategies.

What Are Daily Index Options?

Most investors are familiar with stock options, which provide the right to buy or sell an asset at a preset price. By selling call options, known as a “covered call,” you can generate immediate premium income in exchange for agreeing to sell at a set price. 

While most covered calls expire in a month or longer, daily covered calls, also known as 0DTE covered calls, issue and expire on the same trading day. So, if the price doesn’t rise above the strike price, you keep the premium income and the underlying asset.

Generally, you can use daily index options to make directional market bets on the broad market, although there are a handful of 0DTE options on popular stocks.

The most popular daily index options include:

• S&P 500 Index Options
• Mini S&P 500 Index Options
• Nasdaq 100 Index
• Mini Nasdaq 100 Index Options

optionDash provides an intuitive option screener with the ability to search for daily covered call options. Source: optionDash

The easiest way to find daily covered call opportunities is using an option screener like optionDash. Using these tools, you can search for options with an expiration the same day as your search.  The results include various  strike prices with the ability to assess their downside protection, if-called return, annualized return, and other fundamental and technical factors to decide if the option cost and risk are worth the income.

In addition to daily covered calls, optionDash can help you find longer-dated covered calls and cash-secured puts. You can also access a proprietary scoring system that factors in fundamental and technical factors to help you spot the best opportunities.

Why Consider Daily Options?

The biggest drawback of conventional monthly covered calls is the high opportunity cost if a stock or index quickly rises above the strike price.

For example, the S&P 500 SPDR ETF (SPY) rose 10.7% between January 1 and April 1, 2024, outpacing the Global X S&P 500 Covered Call ETF’s (XYLD) modest 5.9% total return over the same timeframe. That’s a high opportunity cost even after factoring in the greater risk.

Daily covered calls provide a lot more flexibility. 

For example, you might choose to avoid writing covered calls on days when there’s a Federal Reserve FOMC meeting since an unexpected decision could move the markets higher or lower. Meanwhile, writing call options on other days could help you generate as much income as a monthly covered call.

Alternatively, you may choose to use covered calls exclusively during volatile trading sessions to capture more income than an average day. You can still benefit from long-term trends while generating income during the most profitable trading sessions. And while that’s less income than a monthly covered call, you could capture more upside.

You can fine-tune your exposure to capital gains relative to income rather than trying to predict where the price will be over a month.

Pros and Cons

Most investors choose daily covered calls for added flexibility and higher yield potential compared to conventional monthly covered calls. As we’ve seen, you can avoid many of the riskiest days of the month while writing a greater number of options over time.

In addition, you can sleep easy at night knowing that you don’t have any open positions. There’s no risk of any after-hours moves affecting your overall returns. And your capital isn’t tied up over long periods, enabling you to rapidly pivot to new opportunities.

The biggest caveat is that daily covered calls cap large upside days much more than monthly covered calls. That’s because the same delta options are much closer to the money. 

And, at the same time, the options volatility, or gamma risk, is high on expiration day, and option premiums can move rapidly. So, real-time position monitoring is essential. The strategy isn’t nearly as set-and-forget as monthly covered call options. Daily covered calls are considerably more time consuming than most investment strategies.

Daily Covered Call Strategies

Many traders write daily covered calls on a rolling basis instead of longer-term options. TasteLive found that 0DTE covered calls on the S&P 500 had a 50% greater profit/loss on up days and a 25% worse profit/loss on down days. This strategy could be more profitable than longer-term options before factoring in trading costs and the time commitment.

If you use a tool like optionDash, you could even factor in seasonality to see a stock’s historical performance during certain months, which could indicate its likely future performance during those months. And, by designing your 0DTE covered call strategy around that performance, you could minimize your odds of assignment. Or you could choose only high if-called returns.

Another common approach involves option wheels. You could write a cash-secured put until you’re assigned shares. Then, you could write 0DTE covered calls to generate an income from those shares. And when they’re called away, you could start the wheel process over by selling a new cash-secured put on the same asset.

And finally, you might also consider a hybrid approach. For example, the Roundhill S&P 500 0DTE Covered Call Strategy ETF (XDTE) sells out-of-the-money 0DTE options on the S&P 500 every day while holding a long position overnight. This provides a reasonable amount of exposure to the S&P 500 index with more income than dividends.

Of course, covered calls aren’t the only way to use daily options, either. In fact, according to OptionAlpha, the iron butterfly is the most popular 0DTE option strategy. But these strategies could introduce more risk than covered calls.

The Bottom Line

Daily covered calls, or 0DTE covered calls, offer a compelling alternative to longer-term options. In addition to providing more flexibility, they could provide higher yields than monthly covered calls while opening the door to new strategies like the XDTE ETF.

Of course, daily covered calls aren’t for everyone. If you prefer a hands-off approach to income investing, conventional monthly covered calls might be a better bet. While you don’t have as much flexibility, you don’t need to sit in front of a computer throughout the day to manage your position – in fact, automated tools can do most of the heavy lifting for you!

If you’re new to covered calls, check out our free e-course to learn how they work and strategies for building a portfolio and handling things like roll ups or roll outs. And, if you’re already a covered call pro, optionDash can help you cut down on your research time and avoid costly mistakes with our powerful option screener.